Luxembourg’s new tax incentives for highly skilled talent
Luxembourg is upping its game in the international talent market.
Known for its dynamic economy and attractive business climate, the Grand Duchy has overhauled its tax legislation to lure highly skilled professionals from abroad.
The revamped regime, effective from 1 January 2025, offers significant tax benefits to both expatriate employees and their employers, streamlining the process and reinforcing Luxembourg’s competitive edge.
A flat 50% tax exemption on competitive salaries for inpatriates (up to EUR 400,000)
The heart of the new policy is a flat tax exemption.
50% of an expatriate’s gross annual salary (excluding benefits in kind) is exempt from income tax—up to a cap of EUR 400,000.
In practice, an employee earning a gross annual salary of EUR 300,000 would enjoy a tax-free benefit on EUR 150,000.
For salaries that exceed EUR 400,000, only the portion up to that limit qualifies for the exemption.
This tax relief is available for up to 8 years following the impatriates' first full tax year in Luxembourg. It applies exclusively to income tax and does not extend to social security contributions.
How does the new "inpatriate regime" work?
To tap into these incentives, an employee must be classified as an “impatriate” under Luxembourg law.
This generally means the individual is transferred from abroad to work in Luxembourg.
Typical scenarios include:
- Secondments within Multinational Groups: Employees on assignment from a foreign branch of a multinational group with operations in Luxembourg.
- Direct recruitment: Professionals hired directly by a Luxembourg company or by an entity within the European Economic Area to perform duties in Luxembourg.
What are the conditions for an impatriate to benefit from this favorable regime?
Key eligibility criteria include:
- Recent non-residency: During the 5 years preceding their assignment in Luxembourg, the impatriate must not have been a tax resident, worked professionally in Luxembourg, or lived within 150 kilometers of the border. This requirement excludes both previous residents and cross-border commuters.
- Primary work location: At least 75% of the employee’s work must be conducted in Luxembourg.
- Minimum salary threshold: The base annual salary (excluding any benefits) must be at least EUR 75,000.
- Non-replacement clause: The impatriate should not be hired to replace a local employee who was already performing the role.
Professional expertise:
- For seconded employees, either a minimum of five years’ experience within the company group or five years of specialized expertise in the relevant sector is required.
- For those recruited directly, demonstrable in-depth specialization in a highly strategic sector is necessary. The law is silent on what is a "highly strategic sector".
- The total number of impatriates in a company cannot exceed 30% of the Luxembourg workforce1.
Employers must be ready to substantiate the employee’s international transfer or recruitment history, as well as confirm that the candidate has not been a Luxembourg tax resident in the preceding five years.
The Direct Tax Administration (ACD) will perform post-factum checks to ensure compliance.
Transitioning from the old regime
Employees already benefiting from the previous scheme (those who started their assignment before 1 January 2025) have a choice:
- Stay the Course: Continue under the old regime as long as its conditions remain met.
- Switch to the New Regime: Elect the new 50% flat exemption. This decision is irrevocable and must be finalized by 31 January of the following year.
This flexibility allows both employees and employers to compare the benefits based on individual salary structures, the duration of the assignment, and other personal circumstances.
Boosting strategic and economic growth
While the revised legislation no longer explicitly mandates that positions be deemed “strategic,” the underlying expectations remain.
The requirements for advanced specialization and the inherent challenges in sourcing local talent serve to emphasize the high level of expertise sought.
From a broader perspective, Luxembourg’s reform is designed to:
- Enhance international appeal to make Luxembourg a magnet for highly skilled global talent.
- Stimulate economic growth to infuse the local economy with top-tier expertise and international best practices.
- Simplify administration burdens and replace complex calculations based on actual expenses with a straightforward 50% flat-rate exemption, reducing administrative burdens for companies.
In summary
Luxembourg’s updated impatriate tax regime offers a clear and competitive framework: a 50% tax exemption on the gross annual salary (up to EUR 400,000) for highly skilled workers.
By streamlining the process and reducing administrative complexity (and potentially costs), Luxembourg is positioning itself as an even more attractive destination for international talent—an essential move in today’s competitive global market.
1. This rule does not apply to companies less than 10 years old or to firms with only one employee.
